[Harmohit]

I wonder if open source software can play a role in this. Maybe we can have an open source algorithm for determining credit ratings and private companies only provide a secure database of ratings.

It will also offer the lay person insights into how the credit rating is exactly determined. They can know what is causing their rating to be less than desired and take appropriate action, instead of watching a random youtube video titled "5 ways to quickly improve your credit score".

[akira2501]

> and take appropriate action

Presumably the reason they have a lower score than desired is because they already failed to do this in one form or another.

> "5 ways to quickly improve your credit score".

Have no inquiries. Have no forced account closures or writeoffs. Have as much total open credit as you can without triggering the first two. Have at least one secured or unsecured installment loan open and then paid off every 5 years. Always pay your bills on time.

It's not quick, I suppose, but the recipe is already pretty well known.

[ourmandave]

Thinking of my last loan application, they ask you if you own or rent and how long you've been at that address. Also current job and income and how long there.

[jon-wood]

At least in the UK this is done as well as pulling your credit score, traditionally it's not a factor feeding into your credit score. Banks check both your history of paying off debts and your ability to continue doing so, it doesn't matter how good your score is, if you ask for an unsecured loan that's 20x your annual income over the next 5 years it's going to get refused.

This is all somewhat complicated by recent products from credit agencies, which make use of the Open Banking standard to pull data direct from your bank accounts and use that data to feed into credit scoring as well.

[Dalewyn]

Pretty much, yeah. A credit score is a descriptor of the risk of financial loss when lending the individual concerned some money.

So the only real way to grow and keep the score high is:

* Pay your credit card and loan statements when they are due (late payments imply you don't have money).

* Keep credit inquiries to the minimum necessary (an inquiry means you're asking for a loan, implying you don't have money).

* Don't max out your credit limits if possible (you're taking and maxing out lines of credit, implying you don't have money).

* Keep old credit cards open even if you don't use them, if it's practical (a longstanding open line of credit implies you have money).

* Keep doing all of the above for many years (a good credit score implies you have money and will pay back debts incurred).

There's no magic or mystery to it, it just takes a lot of time to grow and keep high because you're building and maintaining trust with banks. You know that old saying? Trust is built over years but destroyed in a second? Yeah.

[ykonstant]

More than half of the above don't imply that you don't have money. Lack of money is only one of the possible reasons for those situations.

* an inquiry means you're asking for a loan, implying you don't have money

Entities with tons of money seek loans all the time for liquidity and risk mitigation.

* you're taking and maxing out lines of credit, implying you don't have money

Nope, lack of understanding how CC scoring works (scoring designed to keep you in the credit mill) can lead to maxing out while being perfectly comfortable financially.

* Keep old credit cards open even if you don't use them, if it's practical (a longstanding open line of credit implies you have money).

What in tarnation.

This entire charade is a grotesque dance of mad clowns.

[akira2501]

> can lead to maxing out while being perfectly comfortable financially.

Total credit usage can have an impact. So if all your lines of credit are at maximum, this is a negative signal. If one or more is, but your total utilization is 75% or less, it should have little to no impact.

This is why the installment loan part is useful. It starts at maximum balance and you immediately pay that down. It's not as strong of a positive signal until you hit payoff but it's a pretty massive one the day you do.

[Dalewyn]

>Lack of money is only one of the possible reasons for those situations.

As far as a lender is concerned, if you don't pay back your debts you might as well not have money even if you actually do.

>Entities with tons of money seek loans all the time for liquidity and risk mitigation.

And each and every one of those inquiries will lower your credit score, because you're taking on more debt. Do you have money? Will you pay the debt back? The more inquiries there are (the more you ask for loans) in a given span of time, the less likely it is you have money and will pay debts back.

>Nope, lack of understanding how CC scoring works (scoring designed to keep you in the credit mill) can lead to maxing out while being perfectly comfortable financially.

Banks hate seeing lines of credit maxed out. Ask any banker worth his salt and they will all tell you the same.

If it wasn't obvious already, banks don't like lending money. That might sound strange, but for a bank (the lender) a loan is an investment and investments are risks. The more loans (debt) someone has, the more risk they are carrying and thus their credit score will reflect that.

>What in tarnation.

A line of credit in good standing that has been open for a long time means you've been making your payments properly, meaning the risk of lending money to you is lower than someone who does not have a line of credit as old. Thus, your credit score will be higher.

The age of your credit is usually determined by your oldest open line(s) of credit. Closing an old line of credit means it will eventually fall off your credit report and stop being reflected in your credit score, which will fall to reflect the new and younger age of your credit.

Again: Everything about credit score is solely about the risk you might pose to a lender. Anything that increases that risk will lower the score, and vice versa, even if it's just an implication.

[worstspotgain]

> banks don't like lending money

Not quite. If you're not lending money someone else has deposited, you're not a bank. Banks have to lend money. Problems arise when they lend too much or lend badly.

If we want to spitball, we don't really need banks. In the age of computers, the central bank could take on their ledger function without breaking a sweat. It could then contract out the lending and deposit functions separately.

The deposit function is trivial. All deposit institutions would be 100% trustworthy. They'd just basically be ATMs for your account at the Fed.

The lending function is slightly hairier. The Fed would set risk parameters and performance-based revenue sharing. The lenders would have one client to please, and would be barred from many of the shenanigans they do today. However, they'd have a rent-seeking incentive.

[bux93]

Inquiries impact your credit score negatively not because you took on more credit, but because you (most likely) didn't.

The correlation is that if you get rejected by lender A, and try a new application at lender B, and again at lender C, you will have a lot more inquiries than some-one who got credit extended at the first try. FICO don't know if you actually got rejected, or if you were just checking rates, nor do they know what the reason for rejecting you was (maybe they don't even serve your area but their funnel doesn't filter on that early enough) - they just know you were checked.

This particular one is a bit iffy, my bank's UI essentially tricked me into a credit check. Then again, all of them are quite iffy and based on a few datapoints that FICO has access to, which omits many of the things you'd look at during any kind of manual underwriting.

[matwood]

It's not about having/not having money, it's about propensity to pay. Obviously, people need money to pay, but someone can have all the money in the world and still default on loans by not paying.

[Workaccount2]

This is an edge illogical case. Like technically you can sell your apple shares for $5/share, but no broker even has the functionality to let you voluntarily take a loss.

When someone with money defaults on a loan, it's usually because a.) they don't actually have money or b.) the loan is for their company, not them.

All that to say that "having money" is functionally equivalent to "propensity to pay".

[mschuster91]

> Keep credit inquiries to the minimum necessary (an inquiry means you're asking for a loan, implying you don't have money).

This one should be outright banned, as it's effectively anticompetitive - there are thousands of banks on the planet, and it should be anyone's right to make an inquiry at each and every single bank to make sure one gets the best rates.

[tzs]

FICO considers hard inquiries (other than for credit card applications) within 45 days of each other to be just one hard inquiry.

[matwood]

Yes, but the reason they say to do all the inquires around the same time is b/c many inquires spread out is a negative signal. It can mean that banks are turning a borrower down for whatever reason so they are now looking for a bank to take on the risk.

[alistairSH]

Not only do banks and credit agencies provide a "recipe" for improving your score, most do so free of charge (for existing customers).

For example, I know my score swings by +/-30 points/month. I'm fairly confident that is due to the balance on my CCs varying when the score is calculated (there is nothing else about my financial situation changing - same house for a decade, same car loan for 5 years, no new credit lines/loans, etc). But, I pay the cards off every month, and the score always rebounds.

[jjav]

> I'm fairly confident that is due to the balance on my CCs varying when the score is calculated

Yes. It feels wrong that the current balance of credit cards is considered debt. It should only be considered debt once (if) you start paying interest on it. So if you pay it off fully every month, it shouldn't be seen as debt.

But whatever, they consider it debt so it can make the credit score swing up and down a lot. I see this every late summer when I pay my childs school bill for the upcoming year on a credit card. It is a very large amount so suddenly my credit utilization goes up and my credit score drops around ~70 points. Then a month later I pay it off and the credit score goes back up the same ~70 points.

[matwood]

Mine swings monthly for the same reason, though not as much. The report I get tells me why it swings ('used credit balance').

[alistairSH]

Yeah, I was surprised at how much it swings, but it's high enough it shouldn't matter (and easy enough to not use the cards for a month, let it rebound, then borrow whatever I need to borrow).

The report from my bank never says why. It does list factors that contribute to my score, but they're all "good" (low usage as % of available, all payments on time, etc). And never change.

[matwood]

I'm signed up for all the credit bureaus free accounts so I can freeze/unfreeze my credit. They send out reports monthly, along with one of my CCs. All of them have the reason. And yeah, the score is ~800 so it doesn't really matter. Still interesting to see how it moves with relatively small balance changes.

[astura]

FICO already tells you what goes into their scoring algorithm. It's not a mystery.

https://www.myfico.com/credit-education/whats-in-your-credit...

[isthatafact]

I was curious, so I checked that page and did not find the equation used to calculate the "score", only vague hints.

Is there a formula, spreadsheet, or code that people could use to verify their score? Or is it indeed a mystery?

[standardUser]

These agencies had far less regulation and transparency before Dodd–Frank in 2010.

[astura]

So?